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dc.contributor.author de Araujo, Pedro
dc.date.accessioned 2008-05-06T19:07:45Z
dc.date.available 2008-05-06T19:07:45Z
dc.date.issued 2008-04-30
dc.identifier.uri http://ssrn.com/abstract=1127342 en
dc.identifier.uri http://www.iub.edu/~caepr/RePEc/PDF/2008/CAEPR2008-012.pdf en
dc.identifier.uri http://hdl.handle.net/2022/3126
dc.description.abstract Using U.S. cross-sectional data, this paper calculates the welfare cost of a 10% inflation for different individuals and finds that the difference in cost between the poorest 10%, measured by their expenditure share on cash goods, and the richest 10% is in the order of 176%. That is, a poor person is on average willing to forgive 176% more of their total consumption in order to have inflation reduced from 10% to 0. In absolute terms this represents a cost of 2.687% of consumption for the poorest and 0.974% for the richest. I accomplish this by introducing preference heterogeneity in a monetary search model first developed by Lagos and Wright (2005), and calibrate the model to match the expenditure share on cash goods and total expenditures for each individual type using data from the Consumer Expenditure Survey (CEX) for the second quarter of 1996. I also show that this welfare difference increases to 210% (10.522% for the poorest 10% and 3.401% for the richest 10%) whenever frictions in the use of money are imposed (holdup problem). The ability to explicitly model these frictions is the advantage of using this model. Hence, inflation in this framework, as other studies have shown, acts as a regressive consumption tax; and this regressiveness is augmented with the holdup problem. en
dc.format.extent 396651 bytes
dc.format.mimetype application/pdf
dc.language.iso en_US en
dc.publisher Center for Applied Economics and Policy Research en
dc.relation.ispartofseries CAEPR Working Papers en
dc.relation.ispartofseries 2008-012 en
dc.relation.isversionof This paper is also available on SSRN and RePEc. en
dc.subject CAEPR en
dc.subject Center for Applied Economics and Policy Research en
dc.subject Inflation en
dc.subject welfare en
dc.subject search en
dc.subject holdup en
dc.subject Monetary Economics en
dc.title Calculating Welfare Costs of Inflation in a Search Model with Preference Heterogeneity: A Calibration Exercise en
dc.type Working Paper en


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